Volume gains on up days support rally hopes

What's perhaps a more crucial test, though, comes on sell-off days

By

LauraMandaro

NickGodt

SAN FRANCISCO (MarketWatch) -- Volume on the major exchanges picked up in the past two weeks as a nascent rally gained strength -- a hopeful sign that stocks won't so easily relinquish their gains this time around.

"Volume was pretty impressive coming off a bottom," said Michael Gibbs, director of equity strategy at Morgan Keegan in Memphis. "It's a good sign."

Still, strategists caution that any bounce -- even one supported by higher volume in its early days -- may benefit short-term traders more than their buy-and-hold brethren. That would be the case if stocks rally for a while and then sink back into the doldrums.

"This could easily be a bear-market rally," Gibbs added.

So far, however, volume is offering a glimmer of hope.

The volume of shares traded on the New York Stock Exchange, one measure of market activity, has topped the 50-day moving average on six of the seven days that the stock market has rallied since March 6 -- the day on which the S&P 500 touched its most recent low. The broad benchmark index has gained 15% since that low, sparking hopes of a recovery.

On some of the stock market's biggest days this month, volume has surged.

On March 10, when comments from Citigroup about its profitability thus far this year drove the Dow Jones Industrial Average
DJIA, +0.72%
to its biggest one-day gain since November, 2.2 billion shares changed hands. That was 43% above the average.

On Wednesday, when the Federal Reserve surprised markets by saying it would buy $300 billion in Treasurys, sending the S&P 500 up 2.1%, volume again topped 2 billion shares and was 30% more than the average.

Nasdaq volume topped its average on those days, but by a more modest amount.

Volume is just one of the many signs that investors are looking at as they try to predict whether stocks can break free of a steep decline that started in October 2007.

Recent rallies, such S&P 500's roughly 20% advance between late November and early January, have been ambushed by fresh rounds of bad economic and banking-industry news. The S&P 500 earlier this month hit a fresh 12-year low, wiping out years of investor savings.

"Volumes show you ... whether there's any form of institutional buying," said Barry Ritholtz, CEO and director of equity research at Fusion IQ. "Real heavy volume tells you that there's a lot of institutional buyers there."

One worry among stock analysts is that hefty gains in financial stocks, which have underpinned the broader stock-market rally in recent weeks, stem more from hedge funds unwinding short positions than from investors placing long-term bets on bank stocks. Read more on financial short covering.

Down end to an up week

On Friday, the financial sector fell for the second straight day, weighing on the broader market. The S&P 500
SPX, +0.59%
closed down nearly 2% at 769 points, while the Dow Jones Industrial Average
DJIA, +0.72%
declined 1.7% to 7,278 points.

Still, the S&P 500 and Dow industrials locked in their first 2-week-long winning stretch of the year. During these two weeks, volume has run about 20% higher than average. Read more in Market Snapshot.

On Friday, volume on the NYSE rose to 2.5 billion, or 50% more than the average. That's not a good sign, however, on a day when stocks stumble, according to strategists.

But the day's jump in the number of shares changing hands was likely skewed by the expiration of options on what's known as a quadruple-witching Friday, said Gibbs of Morgan Keegan.

Bear-market bounce?

Regardless of volume trends, plenty of strategists are skeptical that this rally is putting down strong enough shoots to support lasting growth.

"Volume has improved modestly on the rebound, which is positive," said Russ Koesterich, global head of investment strategy at Barclays Global Investors. "That said, I think people are making too much of that fact."

He said he's more focused on a recovery in the credit markets and on leading economic indicators.

What happens with volume when stocks sell off, though, is key. Strategists hope to see volume wane when stocks decline.

"During this consolidation or profit-taking phase, we'll watch the volume. We'd like to see volume pull back and the S&P 500 hold above the 750 level," said Gibbs.

That's not what happened in February, when volume shot upward as stocks plunged. NYSE volume surged more than 60% atop its 50-day moving average Feb. 27, when fears about bank natonalization sent the market skidding.

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